Value Investing Live Recap: Eric Heyman and Tim Kang

GuruFocus had the pleasure of hosting a presentation with Eric Heyman and Tim Kang from Olstein Capital Management.

Heyman joined Olstein Capital Management’s investment research team in January 1996. He is the lead manager for Olstein Capital Management’s SMID Value Equity strategy and co-portfolio manager of the Multi Cap Value Equity strategy. Heyman has served as portfolio manager of the Olstein Strategic Opportunities Fund since its launch on Nov. 1, 2006, and as co-portfolio manager of the Olstein All Cap Value Fund since Oct. 31, 2008.

Since June 2005, as director of research, Heyman oversees the ongoing generation of investment ideas, sector and company coverage and the orderly flow of information throughout the research department. He has written articles on investing for Crain’s Publications and the American Association of Individual Investors (AAIII Journal); he has also been quoted or featured in numerous business media outlets such as The Wall Street Journal, The New York Times, SmartMoney, The Wall Street Transcript and the Associated Press.

Previously, Heyman held the position of accountant with Norstar Energy, a subsidiary of Orange and Rockland Utility. He holds a B.B.A. in accounting from Pace University.

Kang joined Olstein Capital Management in April 2006 as a member of the research team that analyzes viable investments for the firm’s portfolios. Previously, he held the position of vice president – equity research analyst with Citigroup Asset Management, covering Asia except Japan financial stocks, and assisting in covering U.S. bank stocks.

Prior to Citigroup, he was an assistant vice president at PPM America Inc. as a member of the high-yield bank loan team working on private bank loan transactions in all industry sectors. Previous to PPM America, Kang was a senior auditor at Arthur Andersen L.L.P.

He holds a M.S. in accountancy from DePaul University in Chicago and a B.S.S. with a concentration in economics from Northwestern University in Evanston, Illinois.

Watch the full presentation here:

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Key takeaways

Heyman kicked off the duo’s presentation by giving a brief overview of the presentation and then took a moment to give an overview of Olstein Capital Management. The firm follows an accounting-driven, value-orientated investing philosophy and looks for companies trading at prices that do not reflect their underlying value.

Kang then took the reins to explain the different factors that may cause a company to be trading at an inaccurate price. These factors include outdated perceptions, temporary issues or challenges, unrealistic expectations and factors that may conceal a company’s growth potential.

Heyman also chimed in to hit on their last point that both negative and positive sentiment can cause the price of a company to be skewed. He explained that current things happening in an industry are believed to be something that will last forever. Everything from Covid-19 to elections and the internet bubble have had major effects on overall investor sentiment in recent history. Relying on analysis allows the Olstein team to sort through opportunities without emotion to find good investments.

The duo continued on to their next point, which they drove home throughout the question and answer time with the audience. They focus on free cash flow, which they believe to be the lifeblood of the business. Free cash flow can have a major effect on shareholder value by allowing companies to withstand downturns, increase dividend payments and reduce outstanding debt.

Continuing on, Heyman highlighted the firm’s forensic analysis of financial statements as a key way to avoid errors in investments. By determining the quality of a company’s earnings, they are able to create a sustainable strategy and minimize financial risk.

The team rounded out their presentation by going in-depth into their investment process, which can be broken down into five main parts. A screening process identifies noteworthy deviations and misperceptions in the market. Then an initial analysis is used to determine the overall strength of a company’s balance sheet. Next, forensic analysis determines the true financial strength of a business and discounted free cash flow modeling determines value. Finally, the team constructs a portfolio with sell decisions based on valuation targets.

Stocks

While explaining the different reasons a company’s stock may not reflect the true value of its business, Kang used several different stock examples. His first example was The Shyft Group Inc. (

SHYF, Financial), which he explained was a commercial vehicle manufacturer. He noted the company was involved in a secular shift to last-mile delivery, which might have been missed by other investors.

His next example looked at Prestige Consumer Healthcare Inc. (

PBH, Financial). He explained that a changing retail distribution channel led to negative growth. Looking deeper, the team found that the products were actually consumed at a greater level that could not be seen by the top level revenue figures.

Questions

One question from the audience asked Heyman and Kang how they would go about making a fast and accurate evaluation of a company. Heyman jumped in first to explain that the first thing the firm always does is to dive into the balance sheet and gain an understanding of a company’s financials. If a company is generating solid free cash flow, they are happy enough to move it to the side and not make an investment.

Kang continued to tell the audience that it is easier to rule out an investment than to invest money. Trying to do a fast analysis of a company and making an investment is not something the firm will ever do. They are looking for good investments and are more than willing to avoid an investment regardless of how many headlines it may be making if the balance sheet is not strong.

Another question asked the team how they are able to make investments at their preferred 30% discount to intrinsic value in a market that seems so overvalued. Heyman was quick to jump in to reiterate that the firm does not look at investments from a market stance.

He explained that their strategy takes business and evaluates them outside of the market to determine if they would make a good fit in a portfolio. They focus on free cash flows and the normalized cash flows of these businesses. He believes that there are still many undervalued companies that offer up great opportunities despite the market looking overvalued.